Invariably, in a dynamic world such as cryptocurrencies, mistakes will be made. Mine was to cast doubt on the sector along with related enterprises like Coinbase (NASDAQ:COIN). By practically any rational measure, Coinbase appears extremely overvalued. However, bearish traders must arguably wave the white flag because the underlying demographic catalyst may be too powerful. Therefore, I am switching my tune and going bullish on COIN stock.
Surface-Level Concerns Suggest Caution for COIN Stock
Before diving into the optimistic argument for COIN stock, it’s important to consider the other side. Based on the current situation following the stratospheric rise in the underlying crypto sector that started in October this year, the digital asset exchange and wallet service appears incredibly overvalued.
Late last month, TipRanks contributor Dilantha De Silva stated that the company is “moving in the right direction, and its growth prospects look promising, but COIN’s current valuation leaves no margin of safety for investors.” That beautifully sums up the long-term prospect and the immediate concern for COIN stock. It’s going places, but for now, it might need an oil change.
Further, De Silva notes that “the company is currently valued at a price-to-forward sales multiple of close to 9.0, which implies that the market is placing bets on stellar revenue growth in the coming years.” Here, the major risk centers on the possibility of a crypto bear market materializing. If so, to the author’s point, the downcycle “will wipe billions of dollars worth of trading volume from the market.”
Adding to the anxieties, COIN stock is levered directly to the ebb and flow of crypto pricing, which is volatile. When the bulls smile at virtual currencies, there may be no better sector to be exposed to. However, when the bears start weighing on the blockchain ecosystem, the waters become a feeding frenzy.
As well, there’s the whole matter of the incredible performance that COIN stock recently printed. Just in the trailing month, shares soared roughly 44%. On a year-to-date basis, stakeholders have enjoyed a return of over 412%. Still, that also raises the risks of holding the bag. If a downcycle hits now, COIN newcomers would be devastated.
Generational Shift Should Bolster Coinbase
Back in May 2017, a Gallup poll showed that U.S. stock ownership slipped among all age cohorts except the older, high-income category. Further, more recent data indicates that investors aged 65 and older own 43% of the equities market. As Gallup mentioned, some of the entrenchment in stocks occurred because of economic happenstance.
“As a generation, baby boomers — all of whom were in their prime working years during the economic boom of the 1980s and 1990s, and many of whom likely had 401(k)s at work — have above-average rates of stock ownership,” the study stated.
However, a pivot may be occurring as we speak, which may bolster COIN stock. According to one survey, nearly 94% of crypto investors hail from the age range of 18 to 40; in other words, Generation Z and millennials. As virtual currencies become more ingrained in the mainstream financial ecosystem, this demographic dominance should increase.
That’s especially the case for Gen Z. Its members simply do not have memories of an analog paradigm. As they entered the world, the internet was rapidly expanding in scope and scale. Therefore, it only makes logical sense that the truly digital generation will gravitate toward digital currencies.
Moreover, recent news items such as Coinbase’s expansion into the French financial ecosystem may help smooth out the prior volatility of COIN stock due to its heavy exposure to crypto fluctuations. That’s not to say that Coinbase shares will become as stable as a consumer staples play. Rather, the expansion into major markets should help mitigate some of the pricing wildness.
Either way, the data suggests that young people will continue pouring their dollars into virtual currencies. Thus, over the long run, COIN stock is worth consideration.
Why Valuation Needs Greater Context
Granted, the immediate criticism about the bullish argument for COIN stock comes back to the premium. Right now, shares trade at 14.36x trailing-year revenue. That sticks out like a sore thumb compared to the broader tech sector revenue multiple of only 3.47x.
Still, the context is that while COIN stock is overvalued today, it may not be a decade down the line. Perhaps even sooner than that, acquiring Coinbase shares at this moment might be considered a relative bargain. That’s because fewer people who are “stocks only” will be around, to put it diplomatically. In contrast, Gen Z and younger cohorts will likely be targeting cryptos as their core holdings of choice.
Wall Street’s Take on Coinbase
Turning to Wall Street, COIN stock has a Hold consensus rating based on seven Buys, six Holds, and seven Sell ratings. The average COIN price target is $105.06, implying 38.94% downside risk.
The Takeaway: COIN Stock is Overpriced but on Paper
At first glance, COIN stock appears a risky idea because of its rich sales multiple. While any crypto-related venture incurs downside possibilities, investors should also consider the wider context. And that is the demographic reality that younger people gravitate toward virtual currencies. As such, Coinbase deserves long-side consideration despite its challenges.
